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Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers

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Abstract

We examine four scenarios for the evolution of the biofuel sector using a partial equilibrium model of the world agricultural sector. The model includes the new Renewable Fuels Standard in the 2007 energy act, the two-way relationship between fossil energy and biofuel markets, and a new trend toward corn oil extraction in ethanol plants. At one extreme, one scenario eliminates all support to the biofuel sector when the energy price is low, while the other extreme assumes no distribution bottleneck in ethanol demand growth when the energy price is high. Of the remaining two scenarios, one considers a pure market force driving ethanol demand growth because of the high energy price while the other is a policy-induced shock with removal of the biofuel tax credit when the energy price is high. We find that the biofuel sector expands with a higher energy price, raising prices of most agricultural commodities through demand-side adjustments for primary feedstocks and supply-side adjustments for substitute crops and livestock. With the removal of all support, including the tax credit, the biofuel sector shrinks, lowering the prices of most agricultural commodities. We also find that, given distribution bottlenecks, cellulosic ethanol crowds marketing channels, resulting in a discounted price of corn-based ethanol. The blenders' credit and consumption mandates provide a price floor for ethanol and for corn. Finally, the tight linkage between the energy and agricultural sectors resulting from the expanding biofuel sector may raise the possibility of spillover effects of OPEC's market power on the agricultural sector.

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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 09-wp487.

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Date of creation: Mar 2009
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Handle: RePEc:ias:cpaper:09-wp487

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Keywords: biofuels; EISA; ethanol; tax credit; world agricultural sector model.;

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References

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  1. Tokgoz, Simla & Elobeid, Amani & Fabiosa, Jacinto F. & Hayes, Dermot J. & Babcock, Bruce A. & Yu, Tun-Hsiang & Dong, Fengxia & Hart, Chad E., 2008. "Bottlenecks, Drought, and Oil Price Spikes: Impact on U.S. Ethanol and Agricultural Sectors," Staff General Research Papers 12935, Iowa State University, Department of Economics.
  2. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
  3. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers 12881, Iowa State University, Department of Economics.
  4. Amani Elobeid & Simla Tokgoz & Dermot J. Hayes & Bruce A. Babcock & Chad E. Hart, 2006. "Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, The," Food and Agricultural Policy Research Institute (FAPRI) Publications 06-bp49, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
  5. Thompson, Wyatt & Meyer, Seth D. & Westhoff, Patrick C., 2008. "Model of the US Ethanol Market," FAPRI-MU Report Series 37971, Food and Agricultural Policy Research Institute at University of Missouri.
  6. Du, Xiaodong & Hayes, Dermot J., 2008. "Impact of Ethanol Production on U.S. and Regional Gasoline Prices and On the Profitability of U.S. Oil Refinery Industry," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6353, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Kalaitzandonakes, Nicholas G. & Kaufman, James & Meyer, Seth D. & Thompson, Wyatt, 2008. "The Impact of Biotech Corn Traits on Ethanol Production," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri 53499, Farm Foundation, Transition to a Bio Economy Conferences.
  8. Simla Tokgoz & Amani Elobeid & Jacinto F. Fabiosa & Dermot J. Hayes & Bruce A. Babcock & Tun-Hsiang (Edward) Yu & Fengxia Dong & Chad E. Hart & John C. Beghin, 2007. "Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets," Center for Agricultural and Rural Development (CARD) Publications 07-sr101, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  9. Westhoff, Patrick C. & Thompson, Wyatt & Meyer, Seth D., 2008. "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options," FAPRI-MU Report Series 37772, Food and Agricultural Policy Research Institute at University of Missouri.
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Citations

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Cited by:
  1. Ciaian, Pavel & Kancs, d'Artis, 2011. "Interdependencies in the energy-bioenergy-food price systems: A cointegration analysis," Resource and Energy Economics, Elsevier, vol. 33(1), pages 326-348, January.
  2. Condon, Nicole & Klemick, Heather & Wolverton, Ann, 2013. "Impacts of Ethanol Policy on Corn Prices: A Review and Meta-Analysis of Recent Evidence," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149940, Agricultural and Applied Economics Association.
  3. Ciaian, Pavel & Kancs, d'Artis, 2011. "Food, energy and environment: Is bioenergy the missing link?," Food Policy, Elsevier, vol. 36(5), pages 571-580, October.
  4. Moschini, GianCarlo & Cui, Jingbo & Lapan, Harvey E., 0. "Economics of Biofuels: An Overview of Policies, Impacts and Prospects," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 3.
  5. Wetzstein, M. & Wetzstein, H., 2011. "Four myths surrounding U.S. biofuels," Energy Policy, Elsevier, vol. 39(7), pages 4308-4312, July.
  6. Rebecca S. Dodder & Amani Elobeid & Timothy L. Johnson & P. Ozge Kaplan & Lyubov A. Kurkalova & Silvia Secchi & Simla Tokgoz, 2011. "Environmental Impacts of Emerging Biomass Feedstock Markets: Energy, Agriculture, and the Farmer," Center for Agricultural and Rural Development (CARD) Publications 11-wp526, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  7. Wetzstein, Michael E., 2010. "Should We Invest in Biofuels?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 42(03), August.
  8. Bou√ęt, Antoine & Dimaranan, Betina V. & Valin, Hugo, 2010. "Modeling the global trade and environmental impacts of biofuel policies," IFPRI discussion papers 1018, International Food Policy Research Institute (IFPRI).
  9. Paudel, Krishna P. & Timilsina, Govinda R., 2010. "Would There Be Surplus Grains for Biofuels? An Assessment of Agro-economic Factors and Biofuel Production Potential at the Global Level," Staff Papers 113125, Louisiana State University, Department of Agricultural Economics and Agribusiness.

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